NBFC's (Non Banking Financial Companies) are reported periodically to be
under the RBI (Reserve Bank of India) lens for one reason or the other.
Under the circumstances, any effort by RBI to rationalize the regulatory
framework of NBFC's is highly welcome. Of particular concern to RBI
appears to be the exposure of those NBFC's that even while not accepting
deposits from the public are still raising resources banks and financial
institutions and diverting to the stock market. The evolution of RBI as
the banking sector regulator to also being the regulator for NBFC's has
not been well planned. A particularly manifest evidence of this is the
confusion in legislation and in policy reflected in the multiplicity of
overlapping and irrational classifications of the various types of NBFC's.

The most apt illustration of this is the fact that whereas the Reserve
bank of India Act 1934' does itself define the term NBFC, there is a
different definition of the same term viz. NBFC in the Non-Banking
Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1988' that the RBI itself has issued under sections 45 J, 45K,
45M and 45MA of the aforesaid Act of 1934. Why has RBI made NBFC a house
divided unto itself by adopting an incongruous definition of an already
defined term in its own parent statute?

NBFC under the RBI Act

Under section 45-I(a) of the RBI Act,1934 business of non banking
financial institution ', is defined in terms of the business of a
financial institution and NBFC.
Sec: 45-I(a) : business of a non-banking financial institution means
carrying on of the business of a financial institution referred to in
clause (c) and includes business of a non-banking financial company
referred to in clause (f);]The Act defines Financial Institution' (FI) u/s 45-I(c) as
financial institution means any non-banking institution which carries on
as its business or part of its business any of the following activities,
namely :-
(i) the financing, whether by way of making loans or advances or
otherwise, of any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities
issued by a government or local authority or other marketable securities
of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase
agreement as defined in clause (c) of section 2 of the Hire-Purchase Act,
1972 (26 of 1972);
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time
being in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by
whatever name called monies in lump sum or otherwise, by way of
subscriptions or by sale of units, or other instruments or in any other
manner and awarding prizes or gifts, whether in cash or kind, or
disbursing monies in any other way, to persons from whom monies are
collected or to any other person,
The definition of FI uses the definition of a Non Banking Institution. (NBI)
and NBI has been defined under the Act as follows:
Sec.45-I(e) : non-banking institution means a company, corporation or
co-operative society.

NBFC', itself is defined under sec. 45-I(f) of the Act, as under
Sec. 45-I(f): ) non-banking financial company means-
(i) a financial institution which is a company;
(ii) a non banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as
the bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.]

An analysis of forgoing provisions reveals that except for specifically
notified categories, a company that is a FI, or a NBI receiving deposits,
alone would qualify as an NBFC. A further reading of the definitions of FI
and NBI reveals that for a company to be an NBFC it should either carry on
any of the businesses as enumerated in (i) to (vi) of Sec. 45-I(c) or it
should otherwise receive public deposits in any manner.

Regulatory Framework of NBFC's

Section 45-IA of the Act requires registration of NBFC with RBI and
maintenance of minimum NOF.
Sec 45-IA : (1) Notwithstanding any thing contained in this chapter or any
other law for the time being in force, no non-banking financial company
shall commence or carry on the business of non-banking financial
institution without-
(a) obtaining a certificate of registration issued under this chapter ;
and
(b) having the net owned fund of twenty-five lakh rupees or such other
amount, not exceeding two hundred lakh rupees, as the Bank may, by
notification in the official Gazette, specify;

(2) Every non-banking financial company shall make an application for
registration to the Bank in such form as the Bank may specify.
RBI is entrusted with the responsibility of regulating and supervising
NBFC by virtue of powers vested in Chapter IIIB and by sections 45J, 45K
and 45 MA of the RBI Act, 1934 (2 of 1934). The regulatory and supervisory
objective is to;
# ensure healthy growth of financial companies;
# ensure that these companies function as a part of the financial system
within the policy framework, in such a manner that their existence and
functioning do not lead to systematic aberration; and that
# the quality of surveillance and supervision exercised by the Bank over
the NBFCs is sustained by keeping pace with developments that take place
in this sector of the financial system.

Accordingly, the RBI has issued directions from time to time. Of
particular relevance to NBFCs is the APD direction, where the RBI has
adopted another definition of NBFC.

NBFC under Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (APD
Directions)
Para 2(1)(xi) of APD directions defines NBFC as
Non-banking financial company means only the non-banking institution which
is a loan company or an investment company or a hire-purchase finance
company or an equipment leasing company or a mutual benefit financial
company.

The terms used in the above cited provisions are also defined in the APD
directions, as under:
Loan company [ para 2(1)(viii) of APD directions]
Loan company means a company which is a financial institution carrying on
as it's principal business the providing of finance whether by making
loans or advances or otherwise for any activity other than its own but
doesnot include an equipment leasing company or a hire-purchase finance
company.

Investment company [ para 2(1)(vi) of APD directions]
Investment Company is a company which is a financial institution carrying
on as it's principal business the acquisition of securities.

Hire-purchase Finance Company [ para 2(1)(iv) of APD directions]
any company which is a financial institution carrying on as its principal
business the activity of hire purchase transactions.

Equipment Leasing Company [ para 2(1)(ii) of APD directions]

means a company which is a financial institution carrying on as it's
principal business, the activity of leasing of equipment.

Mutual Benefit Financial Company [ para 2(1)(ix) of APD directions]

means a company which is a financial institution notified by The Central
Government under section 620A of The Companies Act 1956.
Each category of above notified companies is an NBFC for the APD
Directions. As per the definition given in the APD directions, these
companies are a kind of financial institution'. APD directions do not
define financial institution. Therefore financial institution' mentioned
under the APD directions imports its meaning from the definition in
section 45-I(c) of the RBI Act. This is consequent to Para 2(2) of APD
direction which states
Words or expressions used but not defined herein are defined in The
Reserve Bank of India Act, 1934 (2 of 1934), or in Companies Act, 1956 (1
of 1956) [ or Non-Banking Financial Companies Prudential Norms (Reserve
Bank) Directions 1998 or Residuary Non-Banking Companies (Reserve Bank)
Directions, 1987], shall have the same meaning as assigned to them in
those Acts.
As a consequence, each of these four categories of NBFC's under the APD
Directions are also within the statutory meaning under the Act of the term
NBFC. Thus, NBFC's under the APD Directions are a subset of the NBFC's
under the Act.

Comparison of the two definitions

APD directions cater to a certain type of NBFCs. It is not clear as to why
RBI has chosen to define NBFC in a way different from the definition in
the RBI Act. It is clear that NBFC as defined in the APD directions is
subsumed fully in the statutory definition of NBFC in the Act. In this
scenario, it would have been easy and simple enough for the RBI to refer
to the statutory definition of NBFC as in the Act and then narrow it down
for its purposes. In framing of the APD directions, RBI defines NBFC's
anew and thereupon goes on to identify subcategories such as Loan company
, Investment company, Hire-purchase, Finance company or Equipment leasing
company and Mutual benefit financial company, so as to attract different
paragraphs of the Directions. Needless confusion has been created by RBI
as it would have been simpler easier and more rational to use the
definition already available in the Act.

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